Hacking Society: It's Time To Measure The Unmeasurable

from the value-and-benefit dept

I was lucky enough to attend a small gathering of great thinkers put together by Union Square Ventures earlier this week for an event they called Hacking Society -- which was designed to be a one day open conversation on the economics and power of networks, and how to use that as a force for good, in solving economic and social challenges. There were lots of great thoughts that came out of the event (which was live streamed over the web for people to listen in and participate via Twitter -- as many did). It would be impossible to sum up all of the great points in a single blog post, so I'm just going to discuss briefly the larger themes that hit me and helped to connect a few disparate ideas in my own mind.

The first issue was the role of incumbents (of all kinds) in trying to block innovation. As Clay Shirky amusingly repeated the so-called "Shirky Principle" (not named by him, but for him) on command a few times, "institutions will try to preserve the problem to which they are the solution." Economics professor Luigi Zingales made a similar point, but from a slightly different perspective, noting that "All entrepreneurs want a free market when they enter and don't want one after they win." That's just another way of showing the nature of incumbents under crony capitalism. Rep. Jim Cooper also made a similar point, noting that "The past, in general, is over-represented in Washington. The future has no lobbyists."

These are all variations on the same basic theme -- which all of us know is a significant problem. Of course, we've seen this many times over -- and it's certainly true on one of the key issues we talk about, intellectual property. If you look through the history of intellectual property expansion, it tends to slow innovation. That is, you get areas where there is great innovation, often with little to no protections, and it's then that incumbents demand protectionism in the form of greater IP laws and enforcement. It's a way to lock in their success, and limit disruptive upstarts. It is, as Zingales was saying, a case where the free market is useful until they've won -- and then they use the laws to try to protect their position.

But how do we deal with this problem?

That's where things (not surprisingly) seemed to get bogged down. Some suggested having to play the game the way it's done today -- setting up a SuperPAC, hiring lobbyists, and having "the future" represented in DC. That idea didn't go over too well with the rest of the room, who felt that the power of networks might enable something different and something new. I'd argue that it's even more than that. Because of the power of the incumbency, there's simply no way that anyone could effectively represent "the future" long term from a traditional lobbyist role. You'd always have some who could do it some of the time, but it wouldn't be sustainable -- either due to a lack of true funding to the level of the incumbents, or (worse) having the "representatives of the future" get "captured" by the incumbency.

However, as the discussion danced around this question, something interesting happened. Fred Wilson, from Union Square Ventures, suggested that Craigslist went against the traditional "capitalist" model of maximizing revenue. And while Craig Newmark (in his usual fashion) wouldn't make a direct statement on this, I challenged the assumption -- as I did in writing many years ago -- noting that this claim ignores the function of time. Those who think capitalism is about maximizing all revenue at this second are missing out on what it means to maximize revenue over time. That is, if Craigslist raised rates on everything to maximize revenue in the short term, it would almost certainly lead to an untimely death in the long term. That's because it would open up all sorts of opportunities for others to come in and undercut them and take away their business. That gives them the ability to keep customers happy and keep making revenue (and lots of it) in the much longer term. To me, that is true capitalism.

Wall Street thinking is maximizing revenue today -- without consideration for how that impacts revenues over time. That's not strategic and it's not smart. Smart capitalism is recognizing the importance of the time function. It means actually aligning your own best interests with the public's -- because if you don't it just opens up an opportunity for others to better serve the public. So when people suggest (as they did) that companies like Craigslist and Kickstarter are not "maximizing revenue," I disagree completely. They absolutely are, because they're providing so much consumer value, that they're able to continue to make a ton of money themselves, because the public wants to come back and wants to support them. Not because they have no other choice.

In effect, what companies like Kickstarter and Craigslist have shown is the way in which a more strategic player avoids the trap of the incumbent. By thinking that they're not trying to maximize revenue, they actually do end up maximizing revenue, because they take more of a public-first mentality, which drives more business and more opportunity... in part because so much of the value flows back to the public.

And therein lies the challenge of measurability. There is all sorts of economic activity that isn't properly measured today. When people look at Craigslist and say it's not maximizing revenue, that ignores the massive value that it has created, in part by leaving money in the pockets of others (who used to have to pay for similar services) while at the same time providing a tremendously useful service. But, because it's not a direct transaction, it doesn't get "counted" in the traditional sense. Tim O'Reilly really drove this point home in the discussion, talking about how we need to better measure that "hidden economy." That is, we need to measure the true value of something over time, rather than the limited value of just the direct cash transactions.

To some extent, this is a fault of economic linguistics. We measure economic value in monetary value -- even when it doesn't involve money directly. And, yet, because of this, we often forget that non-monetary transactions have tremendous costs, price and value as well. Thus they get ignored. Economics is supposed to be (in part) about that intersection of cost and benefit -- but a very, very large percentage of the economy is not about monetary costs and benefits, even if that's how it's often measured.

The end result, then, is that we're not properly recognizing the benefits (or, indeed, the costs), because we're ignoring the vast majority of those in assuming that anything that doesn't involve monetary exchange has no benefit or cost.

If one thing comes out of this discussion is that I think it's time we start looking for ways to change this. I'd like to start. We've already been doing some research that hopefully highlights costs and benefits in ways that weren't clearly stated previously, but that was very narrowly focused. I'm hoping that as we move forward, we might be able to start to construct new models and new research that really explores the true value of all the benefits and costs of such things. If that, alone, can help companies recognize that the path of incumbency is actually not the best one for long term maximization of benefit, then perhaps we can get more companies to act like Craigslist or Kickstarter -- where even they don't think that they're maximizing revenue, because they choose not to seize the largest possible percentage of the pie today, knowing that by allowing much greater consumer surplus, they're actually expanding their own opportunity for tomorrow.

There was a lot more discussed during the day (and into the evening over drinks and dinner), but this is the line of thinking that has me most interested, and it's an area that I hope to continue to explore -- with your help.

Re:

Do that and you'll invariably end up with something strongly resembling the fairness doctrine and that is just as foolish. Simply stop treating corporations as people and you solve the problem. They have no rights to participate as entities in politics and the government has no rights to directly tax them.

Re: Ban money

"The only way for us to succeed in anything, is to ban money from government elections."

You're confusing the symptom with the disease.

Money in elections is the symptom. The disease is too much ability for government to pick winners and losers. As long as billions of dollars are at stake in elections, people will find ways - fair or foul - to influence them.

The only solution is to cure the disease. Reduce the power of government to pick favorites.

Re: Re: Ban money

Protesting is becoming ever more dangerous and harder to do in America. With H.R. 347 passed, it denies us our 1st amendment.

I agree money is a symptom that it's the way our 2-party system works. Both parties are the same however, because they conduct business the same way. If we jam how they do business we can make progress to amend the constitution.

Re: Re: Ban money

Actually, I think money is the disease. Crony capitalism, bribery (er, lobbying) and the rotating mill of government-corporate-government jobs are the symptoms.

Move toward a true democracy with elections fully funded by the government, put in term limits for all elected positions, remove the merry-go-round of job trading, cancel lobbying by paid shills, simplify laws, make all laws sunset every 7 years, one item per bill, a sixth grade reading comprehension test before final vote and I believe the system will become more self correcting.

Oh, and cancel all IP laws, and simplify taxes, no deductions, just flat rates for everyone that earns enough to pay taxes without putting them under the poverty line (including businesses, go easy on the startups) and the economy will fix itself.

Re: Re: Re: Ban money

I'm saying that political power invites people to spend money to get it. Without lots of discretion (power) for politicians, nobody would be interested enough in politics to spend lots of $ on it.

You're saying that the ability to buy political power invites people to buy power, in order to reap the benefits of power (the ability to steal legally, keep out competitors, etc.).

We're not that far apart. Each feeds on the other.

But if you limit the power of politics (my solution), then the incentive to buy power goes away - because it's not all that valuable to have.

If you limit the ability to spend $ on politics, the incentive to influence those who wield power (either by selecting different politicians or by bribing existing ones) still remains. If you can't spend $ on elections directly, you'll find a loophole - control the media, sponsor slanted "documentaries", etc.

I still think the root of the problem is too much power in the hands of politicians - as long as they have power to choose winners and losers, people WILL find a way to get at that power. Those with $ will always have the advantage.

The only solution is to limit the amount of power that politicians have.

Re: Capital

It's even more simple than that. Capitalism is about making money, full stop. If you focus only on the short term and die due to disruption, you're simply a failed capitalist.

Crony capitalism is as far from true capitalism as socialism is. Protecting either the people or industry will always leave you worse off than if you'd simply forced products/services to sink or swim on their merits. The only thing that should be protected is the ability to compete, with neither the government nor industry permitted to stifle your ability to bring a product or service to market.

It's not just "intellectual property" specifically, it's anti-competitive laws generally. From government established broadcasting to cableco monopolies, government established taxi cab to mailbox delivery to electricity delivery monopolies, the list goes on and on and on. The government does everything in its power to pass anti-competitive laws everywhere you turn. That's the more fundamental problem that needs to be solved.

Re:

and the solution is for us to protest. Look at the protests against ACTA in other countries, why don't we have that here?

Other countries take for granted that government will act self interestedly if citizens don't sufficiently protest. Citizens regularly meet to discuss various political topics and what should be done. Citizens almost expect one another to participate in political matters, you're seen as someone who benefits from the protesting of others if you don't. We don't do that here.

Yes, the Internet is important, but it's only half the battle. Print media can still be used to mass distribute messages to people who may not otherwise see them.

Re: Re:

Protests of government policies generally only work on things done within the two years before an election. That leaves senators safe 4/6 years and the president safe for half his term.

The solution is both grass roots and organized lobbying pressure on the politicians. Using either one alone is simply cutting any effectiveness you hope to have in half. Fighting with half your strength because you dislike the other half makes you a fool.

2nd generation leadership...

...seems to be where problems in keeping a company innovative and competitive happen. Founders start companies on vision and risk. If a company is successful, when leadership passes from the initial founders, those taking over are trained in maximizing profits. The failure here is one of education, and the reluctance of those coming after to roll the dice.

value without money

"The end result, then, is that we're not properly recognizing the benefits (or, indeed, the costs), because we're ignoring the vast majority of those in assuming that anything that doesn't involve monetary exchange has no benefit or cost."

if you can solve how to assign value independent of monetary exchange, this would also form a basis for natural resource valuation! Or, consider that I was sitting in my garden admiring a flower. Does this self-benefit affect how much I "should" have paid for the property? Perhaps it should.

Where does it start/end?

I'm wondering where companies like Amazon, Apple or Microsoft fit in with this? They were, as far as I can tell, originally looking at the big picture (charge less, keep people happy longer) but now seem to be incumbents, to me at least. Not disagreeing with the overall article one bit, just wondering if these three count as incumbents or not?

Re: Where does it start/end?

I'm wondering where companies like Amazon, Apple or Microsoft fit in with this? They were, as far as I can tell, originally looking at the big picture (charge less, keep people happy longer) but now seem to be incumbents, to me at least. Not disagreeing with the overall article one bit, just wondering if these three count as incumbents or not?

Yup. I'd say that they're either incumbents or at the very least transitioning over... Microsoft definitely. Apple and Amazon or more borderline, but certainly have their incumbency moments.

Re: Re: Where does it start/end?

That's been something I have been following more closely in the last few years. It does appear that no matter how well intentioned you were when you started, once you reach a certain size and/or level of success, you begin acting like those who came before you and whom you worked to overthrow/surpass.

I suppose we are at least at the step where we are recognizing the process, even if we don't necessarily have the solution yet. And the anti-trust laws were probably a result of similar trends over a hundred years ago. When companies reach a certain size and become dominant, we can hope market forces knock them off, but if their power/size reinforces their continuing power/size, we start mulling it all over again.

I'm not sure what to do about corporations being able to buy Washington, because we've put into Washington those who have thrived under the current system. We have more sources of information now than ever before, and yet we have a more polarized, less efficient elected government than anyone can remember.

In some cases people have suggested we just wait until voters who support the status quo die off and a younger group comes in with different values/priorities. I think that will work for many areas, though the climate change folks don't think we have time to wait out a generation in terms of radically decreasing fossil fuel consumption.

Not going public?

Seems like the stock market forces companies into focusing on the short-term, so perhaps we need to discourage companies from being publicly traded.

And if we do that, it changes the nature of initial funding, too. If we eliminate IPOs and the like, VCs need to find other ways to claim a return on investment.

And I will toss in that media coverage of which companies are the biggest, growing the fastest, and making their founders the richest also needs to be modified so we seek out a different sort of entrepreneur to be a role model.

I like the discussions coming out of the sustainability and shareable movements because they are questioning many of the basics of growth and consumption.

Re: Not going public?

Seems like the stock market forces companies into focusing on the short-term, so perhaps we need to discourage companies from being publicly traded.

That's actually quite true, though current laws actually do the opposite. But I also think that the problem isn't necessarily "being publicly traded" but how we measure a publicly traded company on a quarterly basis. That guarantees an outlook no more than 6 months out at best, and usually just a single quarter.

It's why you see investors do stupid things like argue that telcos shouldn't invest in infrastructure that will improve their networks...

Seems like the stock market forces companies into focusing on the short-term, so perhaps we need to discourage companies from being publicly traded.

I've actually wondered if you couldn't go in the other direction and sort of attack the system itself by being completely transparent. That is, if you actually revealed financial info *in real time* it's so instant that it actually forces people to look more at the long term rather than the short term. Some say that would actually lead to even shorter term thinking, but I'm not convinced of that.

Re: Not going public?

I also wonder if technology can also reduce the economies of scale so that there is less of an advantage to being a huge corporation.

I'd like to think the future of energy will be localization as much as possible, eventually with everyone generating much of the power that they use on-site. That will take awhile, but if we focus on the future, there may be much less need for massive electric transmission lines to take power from one location to another.

I also don't relish the idea of a company like Apple or Facebook controlling so much. Or Monsanto. So whatever trends there are to break everything down into community-sized pieces is something I am interested in.

Utility vs. Money

Quick thoughts here, ok I know that's not likely but I'll see what I can do...

To me the problem comes down to the fact that once a company "hits the big time" and goes public, it's like all concerns other than money go out the window.

Utility is an interesting thing because it's impossible to measure directly. Money is an indirect measure, but obviously it has its limitations. Inter-personal utility is simply a concept that can't be judged directly, thus the spectacular failures of economic systems which didn't take this fact into account; i.e. they assumed that they could have a few smart people at the top that could figure it all out and that didn't work because there was no way to determine what needed to be produced at any given time...

But, to me (and I've seen it happen at a few small companies I worked for) I think it's sad that money has become the measure-of-all-things. I think it's partially alluded to in the time-preference thing; what's better, a company sustained indefinitely making a small amount of money or one that strikes it rich and eventually ends in a flash? But more than that; to me, a good company enriches everyone it touches: good environment for the employees, good products and customer service, fun work, fun lives for everyone involved.

But as soon as the owners decide "hey, I wanna sell" all that goes out the window. "How can we cut costs?" becomes the mantra. And at that point, even if the 'profitability' goes up, everyone except the very few lose. It's happened so many times; and unfortunately anyone that went against the grain (well, at least especially when we're talking about a public company) and tried to continue to maximize all-around benefit (which unfortunately, as mentioned, can't be directly measured) they would be accused of violating their fiduciary duty to their stockholders.

Although I 'get it' I will never understand why the owners of a company are willing to sell out customers, employees, and themselves, just to eke that last dime out of a sale, and if that's just the natural outcome of hitting it big, then I don't really see much hope.

Re: Utility vs. Money

All this discussion, especially the paragraph which includes

We measure economic value in monetary value -- even when it doesn't involve money directly. And, yet, because of this, we often forget that non-monetary transactions have tremendous costs, price and value as well.

Is this the environmental problem as well?

Superb article and some great quotes.

I can't help wondering about the parallels to environmental and sustainability issues. Incumbents protecting their position and co-opting prominent environmentalists with the illusion that somehow both interests can be served by working together. Also the idea that by selectively deciding what we include in a profit calculation misses the wider and longer term costs - i.e the externalities.

Measure the Measurable -- True Cost

Great post, reposted to Phi Beta Iota the Public Intelligence Blog at suggestion of Michel Bauwens of P2P Foundation.

What your group may have missed is the importance of getting true cost information into the public domain. Once people are acutely aware of the amount of water, fuel, child labor, toxins and other stuff that is in every product or service, it will change the market.

Latin

I'm wondering where companies like Amazon, Apple or Microsoft fit in with this? They were, as far as I can tell, originally looking at the big picture (charge less, keep people happy longer) but now seem to be incumbents, to me at least. Not disagreeing with the overall article one bit, just wondering if these three count as incumbents or not?